Are there opportunities for the international tourism sector in the stock market?
Good morning, everyone!
Up to a few months ago, talking about the stock market in the Dominican Republic was like talking about something that in the popular and even business imagination sounded “futuristic”. The reality is that the announcement and subsequent launch of the public offering of shares made by CESAR IGLESIAS, a company with roots going back to the middle of the last century, and the announcement by PROMERICA to put preferred shares on the market, were like detonators showing the potential of the country’s stock market, just like the closed placements made at the time by CONSORCIO REMIX were to a lesser extent but equally important because they laid the foundations.
But before we get ahead of ourselves, let’s reflect and put things in their place. Why is it possible to talk about the stock market in the Dominican Republic today?
A recent graph published by the World Bank, which I shared with my children who were eager to understand the evolution of the Dominican economy going back to their grandparents’ days to date, shows how per capita income in the Dominican Republic has skyrocketed from US$6,000 in 1990 to US$18,000 in 2021 (adjusted for inflation). That is, the transformation undergone by the national economy in the last 31 years is simply astonishing.
If we can talk about the stock market today, it is not only because we have a robust economy, with a nation in continuous development, as important as that, we have a solid, stable, and growing financial system, as well as successful monetary and exchange policies. Who would invest in Dominican pesos if we did not have a national currency that offers stability to the investor going forward?
That said, let’s answer the opening question of this paper.
The tourism sector and its sources of financing have undergone an enormous transformation in the last 40 years. Gone are the days of INFRATUR as a public financing window for tourism projects, based in the Central Bank; gone also are the days when the national bank was the only one that lent to tourism projects; the 90’s, when there were one or more tourist projects behind each failed bank; times when financiers lent to the tourism sector, pure folly since investments in tourism generally yield medium and long term returns! Gone too are the times when foreign banks were the major players in financing tourism projects.
Not wishing to draw out this introduction, I can now say that the crisis derived from the COVID-19 pandemic demonstrated the importance of the tourism sector for the Dominican economy. When we closed our borders we saw the impact of the loss of income from the tourism sector and we ascertained the importance of communicating vessels with other vital sectors, namely banking, agriculture, construction, and telecommunications, among others, because if we add the more than 6 million tourists arriving to the country to the 11 million inhabitants living here, the Dominican economy becomes the most important in Central America and the Caribbean, underpinned by other export sectors and remittances sent to us by our relatives living abroad.
The pandemic resulted in a powerful alliance between the private tourism sector and the public sector to, very successfully, relaunch the Dominican Republic as a post-COVID tourist destination. Today, it is clear that tourism is the country’s main export industry except that sales occur within the country, that is, without the need for transport or compliance with foreign customs.
Today’s Dominican banking is not only a solid, stable, and dynamic banking system, but it is also the main source of financing for the tourism sector, with a participation close to US $ 1,500 million.
Now let’s look at what opportunities the stock market offers.
Given the proper development of the Dominican financial market in accordance with international practices and standards that respond to a more competitive refined and ever-changing market, part of this boom has been a sudden growth of interest in more complex financing structures stemming from the Securities Market Law 249-17 and the Development of the Mortgage Market and the Trust in the Dominican Republic Law 189-11.
Relevant transactions that were initial milestones supported by these new structures were the acquisition of the Embassy Suites by Hilton Hotel and the Silver Sun Gallery, the creation of the Closed Fund of Companies II via Pioneer SAFI associated with the prestigious international brand Ritz Carlton and The Luxury Collection, where they will invest about US $ 250 million in the first phase, projects that will add 550 rooms to the country’s accommodation supply that exceeds 80,000 rooms; the development of CLUB MED Miches, US$250MM Yanuna project in Macau, St. Regis Cap Cana Resorts & Residences, among others.
However, we should aspire to develop and capitalize on tourism projects via the stock market by placing public stock offering products. What is needed?
The first thing we must understand is that the opportunity offered to us in the tourism sector is not restricted to the hotel sector alone, although this is the broadest and most recognized of its subsectors. Nothing prevents companies from the airport subsectors, marina operators, or complementary offers such as theme parks and restaurants, and even fast food, from accessing the stock market.
Nor is there anything stopping foreign investment companies duly accredited in the Dominican Republic from considering this financing channel for their projects, quite the contrary.
What is clear is that to achieve “the volume and maturity” necessary to see a “dynamic” stock market, we will need a greater number of companies to understand the importance of compliance with legal and accounting rules and provisions, compliance, and corporate governance, in short, transparency in all their operations, leaving behind past practices, often compelled by lack of knowledge of the industry by public sector authorities.
At the same time, national authorities also need to recognize how highly competitive industries operate at an international level, such as the tourism industry, telecommunications, and mining, to mention just 3.
The international stock market has served as a fundraising structure for the tourism market, including the hotel sector, now much more demanding of funds when the investment in an average room in the country is between US$ 150,000 and US$ 250,000, for example, a far cry from the 80s market when an average room cost $50,000. The accelerated commitment to excellence within the Dominican hotel sector and the robust demand for luxury products from our visitors leads us to believe that the average investment per room soon range from US$ 350,000 to US$ 500,000.
We can clearly see that tourism developers of such renowned hotel chains as MARRIOTT INTERNATIONAL, STARWOOD, ACCOR (three of the largest hotel groups in the world for market capitalization), Hyatt, Hilton, Wyndham, IHG, Choice Hotels, and Spanish brands Meliá and NH, all with franchises and projects at the local level, are listed on international stock markets.
The advantages of this type of fundraising, or structuring financing through the stock market, is diverse and could be encompassed in different aspects from advising companies on how to manage their monetary and patrimonial resources efficiently, to capturing long-term investment capital that allows them to develop and grow to serve as a tool and a fundamental pillar for the growth and profitability of tourism companies so they can compete internationally, and above all transcend from generation to generation.
However, it is important to note that opening these new financing structures forces us to make a legal review of practices in the Dominican Republic, of issues such as good corporate governance, compliance policies with anti-corruption laws, prevention of money laundering, good tax practices, development of policies and manuals that guarantee the proper functioning of companies and especially the return for investors, etc.
Before venturing onto the stock market, an analysis of the legal, tax, and practical aspects of the law obliges commercial companies to consider the following aspects:
- The Securities Market Regulator’s (SIVM) Securities and Regulations Act should be considered the main legislation in certain respects for the governance of local corporations, supplemented by the provisions of the Commercial Companies Law No. 479-08 and its amendments.
- The need for faithful adherence to the provisions of the Dominican Tax Code and Law 249-17 and its regulations, to ensure proper organization and filing of accounting records and financial operations, as well as the obligation to publish the financial information of the company listed on the market.
- Develop policies with related parties, which must be approved by the General Shareholders’ Meeting.
- Hold the mandatory Assemblies set forth by the Securities Market Law, in addition to those corresponding to the operation of the company under the company bylaws.
- Separate the figure of the company Chairman from the Chairman of the Board of Directors, as a measure to ensure the transparency and investor protection regime is applied properly.
- Define the remuneration policies applied by the company to the members of the Board of Directors and the main executives.
- Define good corporate governance policies and the process used for their implementation, which must be in accordance with the regulations and guidelines of the Securities Market Regulator (SIMV).
- Mandatory process audits.
But what do we mean by good corporate governance? The idea of good corporate governance refers to the set of principles and rules that regulate the design, integration, and operation of a company’s bodies.
It is, in short, a tool aimed at protecting the interests of the company and its shareholders; an issue that responds to the needs of investors worldwide to guarantee their investment, but above all their return. The principles of the Organization for Economic Co-operation and Development (OECD) for the corporate governance framework are:
- Protect the rights of shareholders.
- Ensure equal treatment of all shareholders.
- Ensure effective reparation for damages that shareholders may suffer for violation of their rights.
- Acknowledge the rights of third parties and promote cooperation between them and companies in creating wealth, jobs, and sustainable financial enterprises.
- Ensure timely and adequate disclosure of the company’s affairs, including financial condition, performance, stock ownership, and management.
- Ensure the strategic guidance of the organization, and effective monitoring of the Board of Directors and its responsibilities to shareholders and investors.
So, the very Securities Law is introducing certain parameters that are completed with the SIMV rules and regulations, as we have said, aimed at guaranteeing these exact same principles and that oblige companies to make certain changes even in their Bylaws before launching into the securities market. We consider the following relevant: - Remove restrictions on the free trading of shares (Article 72).
- Complementary regulation of preferred shares via article 71 of the law.
- Obligation to divulge and identify shareholders, including prior obligations by the SIMV to modify or change control, mergers, restructuring, dissolution, and liquidation of companies. This aspect is vitally important due to the lack of inter-institutional communication and the delays that are often suffered in processes of this kind with government entities, despite efforts by the current government to improve these aspects, users continue to suffer these never-ending woes.
- Obligation to establish a Board of Directors with an odd number of members, establishing a minimum of 5 members by law, as well as defining the principles that should govern the actions, disqualifications, and restraints of board members; and introducing the obligation that 1/5 of the members of the Board of Directors of listed companies be independent (i.e., professionals with vast experience, capacity, and prestige to perform functions impartially)
- Operating provisions of Securities Holders’ Assemblies (under Articles 236-237)
From the fiscal point of view, it is wise to point out that all transactions and returns from the stock market are subject to the regular taxation regime. However, the stock market enjoys certain tax incentives, which are established in articles 329 et sec, summarized as follows: - The transfer of goods or assets to form an independent patrimony, exempt from ITBIS (VAT) and real estate transfer tax; (this applies especially to investment funds)
- The income obtained by the independent patrimony is not subject to income tax. However, it is wise to point out that the company that manages an independent patrimony must retain the income tax of the returns obtained by the investors.
- At the time of its extinction, the restitution or return of goods or assets that make up an independent patrimony will not be subject to VAT, real estate transfer tax, capital gains tax, or tax on issuance of bank transfer checks, as long as they are transferred to the beneficiary of the patrimony.
- There are also other exemptions such as exemptions from fees applied by the Civil Registry when registering authentic acts.
The growth of all sectors, including the tourism sector and the securities markets sector, implies a joint effort by everyone, including government entities, that allows us to protect not only our tourism projects but also investors, in aspects that go beyond corporate governance issues and corporate regulations or the stock market. That they see a proper guarantee and rule of law that allows the growth we have had to date to multiply and transcend.
Finally, I wish to conclude by leaving you the following sentence that encompasses everything we have been talking about, the greater the growth, the greater the need to offer a quality product with a true professional service that allows tourists an “experience beyond the human warmth of our people” that shows them a country rich in natural resources and human resources, that guarantees not only legal certainty and process improvement, but also the continuous growth of our economy.
Thank you very much!
Punta Cana, Dominican Republic
September 08, 2023.
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